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Changes Possibly Coming to CFIUS

Change may be coming to the Committee on Foreign Investment in the United States (CFIUS), but any changes to the jurisdiction or process used by the multi-agency committee that reviews foreign investments in U.S. business for national security concerns are in the preliminary phase and a long way from becoming law. On November 8, 2017, the House and Senate introduced the Foreign Investment Risk Review Modernization Act of 2017 (FIRRMA) proposing modifications to the scope of CFIUS’s review as well as its process. If these proposed changes make it into law, it will be the first modification to CFIUS in a decade. CFIUS is currently authorized by the Foreign Investment and National Security Act of 2007 (FINSA), but legislators, including Senator John Cornyn (R-TX) who introduced the Senate bill, have been discussing potential updates to the law for years. While FIRRMA faces many legislative hurdles, it does have strong bi-partisan support in both chambers.

It is likely that the current proposals will be revised during the legislative process; nonetheless, they offer insight into the topics that Congress and the administration view as most pressing. Here are some highlights of the proposed modifications:

Expanded Jurisdiction: Under FINSA, CFIUS has the authority to review transactions that would result in a foreign entity gaining control, as defined in regulation, over a U.S. business. FIRRMA would expand the scope of CFIUS review to include certain transactions that do not result in foreign control if the transaction involves critical technologies, including all defense articles and services on the USML, all export controlled items on the Commerce Control List other than those controlled solely for anti-terrorism (AT) or crime control (CC) reasons, as well as items necessary to maintain emerging technologies that could be essential for the US to maintain or increase U.S. technological advantage. As drafted, this expansion of jurisdiction includes a carve out for certain investments defined as passive, nonetheless, it could lead to a substantial increase in the number of transactions subject to CFIUS review.

Countries of Special Concern: Countries that pose a significant threat to U.S. national security could be designated a “country of special concern” under FIRRMA. If a transaction involves a country of special concern, that fact would be taken into consideration by CFIUS when determining whether the transaction poses a threat to national security. The bills do not include a list of such countries and do not suggest that such a list, once developed, would be public knowledge.

Declarations: FIRRMA would introduce a new mechanism for informing CFIUS of transactions of potential interest to the Committee: declarations. A declaration would be a more limited filing than a formal notice (FIRRMA suggests a declaration would not exceed 5 pages) and would provide CFIUS the opportunity to conduct an initial high-level review of whether a particular transaction is covered and whether it presents any possible national security concerns. Following the submission of a declaration, CFIUS could request a formal notice, initiate further investigation, inform the parties that it cannot reach a decision based on the declaration, or advise the parties that CFIUS has completed its review of the transaction. While this may present a more efficient method for notifying CFIUS of more borderline transactions, notably, FIRRMA would also mandate that parties file for certain transactions, including all transactions involving a an investment into 25% or more of a U.S. business by a purchaser that is 25% or more owned by a foreign government, even if such an investment did not result in control of the U.S. business.

Expanded Factors for Consideration by CFIUS: FIRRMA would also expand the factors CFIUS considers when analyzing a transaction. These expanded factors would include, among other things, whether the transaction would make the U.S. more reliant on foreign suppliers to meet defense requirements, whether a country of special concern is involved, the extent to which a transaction would expose the personal or other sensitive information of U.S. persons. These criteria, although already often considered by CFIUS, would now be required to be considered by statute.

Filing Fees: Currently, there is no fee to submit a notice to CFIUS. FIRRMA would allow CFIUS to collect fees of up to $300,000 or 1% of a transaction’s value, whichever is lower. For reference, the Hart-Scott-Rodino Antitrust Improvements Act (the mechanism for reviewing the competitive impact of transactions in the United States) has filing fees ranging between $45,000 and $280,000 for transactions valued between $80.8 million and over $807.5 million. The fees never represent as much as 0.1% of the transaction’s total value.

Timing Alterations: Currently, CFIUS review consists of a 30-day review period, which may be followed by a 45-day investigation period, if necessary. FIRRMA would extend the initial CFIUS review period from 30 to 45 days. The secondary investigation period would remain 45 days. The bills would also allow the lead agency, in extraordinary circumstances, to request an extra 30-day review period. In theory, a transaction could now take 120 statutory days from formal notice to final decision, whereas, currently a transaction is only subject to 75 days of statutory review. In practice, under current regulations, parties to more complex transactions are frequently asked to withdraw their transactions from review in order to allow time for additional negotiations while avoiding statutory time pressures. Accordingly, the updated timing requirements in FIRRMA may not serve to increase the amount of time between initial submission and resolution, but rather may permit more transactions to be approved during a single CFIUS review cycle.

Judicial Review: The bills attempt to constrain judicial review of actions and findings by the Committee or the President. Only parties that filed a formal notice or declaration would be permitted to seek judicial review of CFIUS’s or the President’s decisions under FIRRMA. The D.C. Circuit would be granted exclusive jurisdiction over CFIUS issues, and the court’s decision would be required to be based solely on the administrative record submitted by the United States.

As currently drafted, FIRRMA would significantly expand the reach of CFIUS and potentially subject many more transactions to a national security review. These possible changes underscore the importance of involving experienced CFIUS counsel early in transaction planning. Knowledgeable counsel can prevent the expenditure of time and resources on transactions that are unlikely to ever receive CFIUS approval (regardless of whether FIRRMA becomes law) and can assist parties in structuring transactions and presenting proposed transactions in ways that maximize the likelihood of CFIUS approval by assessing ways to mitigate potential national security concerns while minimizing disruptions to the operations of the business to be acquired.

The bills have been referred to appropriate committees within both chambers for further consideration.

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